A Hero's Journey - McDonald's All Day Breakfast

McDonald’s:
All Day Breakfast, A Hero's
Journey
By: Elliot Mar, Erica Lindstrom, Nam Bui,
Phillip Lam, and Will Fung
Strategic Analysis - MGMT 3519
Winter 2016

Table of Contents
Executive Summary........................................................................................................................ 6
Background (Introduction) .............................................................................................................. 1
Scope of Analysis ........................................................................................................................... 4
External Analysis ............................................................................................................................ 5
Macroeconomic Trends:.............................................................................................................. 6
U.S Economy........................................................................................................................... 6
Government Policies................................................................................................................ 7
Consumer Trends.................................................................................................................... 8
Technological Change............................................................................................................. 9
Industry Definition: Fast Food..................................................................................................... 9
Industry Lifecycle....................................................................................................................... 10
Porter’s Six Forces Analysis of the Fast Food Industry ........................................................... 13
Threat of Rivalry .................................................................................................................... 13
Power of Buyers .................................................................................................................... 14
Threat of Substitutes.............................................................................................................. 14
Threat of Entry ....................................................................................................................... 15
Power of Suppliers................................................................................................................. 15
Influence of Complements..................................................................................................... 16
Key Competitors........................................................................................................................ 17
External Analysis of Primary Competitors:............................................................................ 18
External Analysis of Secondary Competitors:....................................................................... 22
Internal Analysis............................................................................................................................ 24
McDonald’s value chain ............................................................................................................ 24
Primary Activities ................................................................................................................... 24
Support Activities ................................................................................................................... 26
McDonald’s Strategy Diamond ................................................................................................. 28
Arenas.................................................................................................................................... 28
Vehicles.................................................................................................................................. 28
Differentiation......................................................................................................................... 29
Staging................................................................................................................................... 29
Economic Logic ..................................................................................................................... 29
McDonald’s Resources and Capabilities .................................................................................. 31

Financial Position ...................................................................................................................... 31
Insights and Critical Challenges (AKA SWOT) ............................................................................ 33
Insights: ..................................................................................................................................... 33
Porter’s Three Tests.................................................................................................................. 35
Test 1: The Attractiveness Test............................................................................................. 35
Test 2: The Cost-of-entry Test .............................................................................................. 39
Test 3: The Better-off Test..................................................................................................... 40
Recommendations........................................................................................................................ 40
Short-Term Recommendations................................................................................................. 40
Medium to Long-Term Recommendations ............................................................................... 41
Create a New Brand “grind.” ................................................................................................. 42
Merger & Acquisition:............................................................................................................. 48
Exhibits.......................................................................................................................................... 53
Works Cited................................................................................................................................... 71

Table of Illustrations (Figures)
Figure 1: McDonald's Financial Performance (U.S. Market).......................................................... 4
Figure 2: McDonald's Position in the Industry Lifecycle............................................................... 11
Figure 3: Attractiveness of the Fast Food Industry (Porter's 6 Forces)....................................... 13
Figure 4: Classification of Competitors......................................................................................... 18
Figure 5: Attractiveness of the Fast Casual Industry (Porter's 6 Forces).................................... 36
Figure 6: List of Potential Cities to Launch "grind."...................................................................... 45
Figure 7: Depreciation Schedule .................................................................................................. 47
Figure 8: Store Opening Schedule for "grind." ............................................................................. 47
Figure 9: Forecasted Number of Stores ....................................................................................... 47
Figure 10: DCF Schedule - Base Case........................................................................................ 48
Figure 11: DCF Schedule - Optimistic Case................................................................................ 48
Figure 12: Strategy Diamond For Target Acquisition................................................................... 49

Executive Summary
This report analyzes the rippling effects of the downfall McDonald’s began to experience
in 2014 and the attempts made to overcome it. McDonald’s is a household name that has been a
staple in American culture since its creation in 1940. They have experienced trials and
tribulations alongside their success since creation. Recently, McDonald’s made the move to
begin serving breakfast all day in response to overwhelming demand and a need to create change
to overcome their financial downturn. We are taking on the position of consultants hired on by
McDonald’s to analyze the success of their move into the market of all day breakfast and the
necessary next steps to remain relevant and successful.
McDonald's is currently categorized as a fast food restaurant. They have been attempting
to move into fast casual dining, at the behest of changing consumer tastes and health trends.
They focus on cheap, fast, and healthy food served all day. McDonald’s also has a strong
community presence and operates globally. After experiencing a 6.8% decline in sales, McD's
has implemented a substantial change by limiting menu customization and offering breakfast
items all day. These small but drastic changes have had a rippling effect on operations,
performance, and sustainability that we will delve into within this study.
After significant research it has been concluded that the move to all day breakfast was a
success, but not without its challenges. That being said, there is much to expand on to continue
growing within the company and industry. Because of all day breakfast, overall sales in in Q4 of
2015 went up 6%. Fast food as a market segment is dying, though it will not ever disappear
completely as long as people are traveling or have low income needs. Building on the success of
the all-day breakfast rollout, we have recommendations we believe will allow McDonald’s to
exploit successful trends in the future market.

In a short term view we have recommended that McDonald’s continue to strive to be the
health leader in the fast food industry, sourcing ingredients that the public perceives to be more
wholesome and healthier overall. We also suggest they look for more opportunities via
technological trends and social media to appease the public demand, just as they did for all day
breakfast. McDonald’s has already begun, and we recommend they continue, to close down low
performing stores. They will also continue to roll out new seasonal menu items, but we suggest
they leverage social media to allow the public to feed ideas to them so they can come up with
new products at a higher rate.
We have also developed and analyzed a long term goal and recommendation that centers
around making or buying a fast casual entity. Looking at the command and market share
restaurants like Chipotle, Panera, and The Counter, have seized, it is easy to see the next
dominant trend the food industry will experience. We will be analyzing the pros and cons of
starting our own fast casual chain, similar to the one Australia has begun with The Corner, or to
purchase a chain like Shake Shack.
Based on an extensive study of the industry and an internal analysis of both the strengths
and weaknesses of the company, we feel that we have made recommendations that will vastly
improve McDonald’s as a whole.

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Background (Introduction)
McDonald’s is a fast food chain that operates globally as a universally recognized and
standardized restaurant. McDonald’s was founded in 1940 as a car hop barbecue drive-in located
in San Bernardino, California. In 1948, the original barbecue was shut down for renovations and
reopened as McDonald's, a self-service drive in restaurant serving nine standardized items. In
1949, the famous McDonalds french fries were added to the menu to replace chips. In 1954, Ray
Kroc journeyed to McDonald’s originally hoping to sell capital equipment, but walked away
determined to be the new franchising agent. That became a reality in 1955 as Kroc opened the
first franchise in Illinois.
By 1965, there would be over 700 McDonald's locations in the United States. Hamburger
University was opened in 1961 and the standardization of McDonald’s operations processes and
employee training began. In 1962 the first McDonalds with indoor seating was opened in
Denver, Colorado, changing the cultural feel of McDonald’s. In 1965, McDonald's celebrated
their 10th anniversary with an Initial Public Offering (IPO) and began offering stock at $22.50
per share. The first commercial aired in 1966 introducing Ronald McDonald as the face of the
restaurant and a character that all of America would come to know. In 1967, McDonald's opened
its first international location which has since expanded to 119 countries worldwide. The
globally recognized Golden Arches were created in 1969 when McDonald’s went through a
global rebranding. Shortly after the 1969 rebrand, the McDonald’s friends joined McDonaldland
in 1971. A crucial change for the McDonald's brand was when McDonald’s introduced the first
Ronald McDonald House in 1974 as a charity organization to help children.
Finally, in 1975, the introduction we were all waiting for was made: McDonald's began
serving breakfast. After the introduction of Ronald McDonald there was a call to action to make

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the restaurant more children friendly. To cater to a child audience, McDonald’s introduced the
happy meal in 1979. Today McDonald's battles a stigma of being unhealthy. To combat this
stigma, McDonald’s added fresh salads to the menu in 1987. America is known for its obesity
and vast food options. In 1988, McDonald’s was named one of the top 100 American-made
products by Fortune Magazine. McDonalds.com was launched in 1996, creating a media
platform for consumers to view and get involved in worldwide. In 1998, McDonald’s made a
huge directional change by rolling out their Made for You Operating Platform. This allowed
consumers to begin customizing their orders. In 2002, McDonald’s began McHappy day,
designated as world children's day, to help raise money for children everywhere. Since this start
they have raised over $170 million dollars from McHappy day events. In 2003, McDonald’s Plan
to Win was launched as a marketing driven plan that incorporated the 4 P’s: Price, Place,
Product, and Promotion. A global packaging plan was rolled out in 2008 that created a
standardized look for all McDonald’s take out packaging. Today, McDonald’s boasts a brand
value for the year 2015 of $39.8 billion, good for the 9th most valuable in the world.
McDonald’s strives to go beyond what they sell. According to their website, “We’re
using our reach to be a positive force. For our customers. Our people. Our communities. Our
world.” They have operated as more than a fast food restaurant for years now in an attempt to
build better communities and increase their impact on the world. From serving good food,
growing their employees into good people, to being a good neighbor, McDonald’s strives to
empower their communities as they expand their franchise and their brand. “We’re proud of
everything we do. And we’re dedicated to doing more. Evolving alongside our customers.
Building memories that last a lifetime. And goodwill that lasts forever.” They have created a

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successful charity to improve the lives of children and participate in community activities such as
neighborhood clean-up days.
McDonald’s is a fast food restaurant that is optimized to use the repetitive unskilled
actions of its workers to generate consistent, low-cost products that keeps consumers coming
back for more. Due to the maturity of their industry, they are fully aligned with the mission they
have, but now must combat a market that is dying in favor of fast casual dining.
In September of 2015, McDonald’s announced a national rollout to begin in October of
that year to serve breakfast all-day, which is a drastic change as it previously only served
breakfast items from opening until 10:30AM. This followed an announcement in which
McDonald’s is slimming down the menu. After the record low numbers McDonald’s
experienced in 2014, they had a wakeup call that sprung them into action to make changes that
would hopefully improve their financial status and overall image. The decision to move to all-
day breakfast was due to a high demand from the public specifically via social media. There was
a huge outcry via Instagram, Facebook, and most specifically Twitter demanding all-day
breakfast. There have been pointed slights and references that McDonald’s would eventually
serve breakfast all-day ever since 1999, when the movie Big Daddy was released.
Here we are, 6 months later, and there is still social media celebration over the
announcement and availability of the Egg McMuffin. When the movie SuperSize Me came out in
2004, McDonald's reputation took a huge hit and they have been combatting that ever since.
With the recent emergence of fast casual dining options, such as Chipotle and Panera Bread, and
the influx of healthier menus across all fast food locations, McDonald’s has been struggling to
maintain their fast food royalty status. This analysis will delve deep into the struggles

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McDonald's has experienced, the effects this move to all day breakfast has brought about, and a
few potential next steps to give McDonald’s a fighting chance.
Scope of Analysis
With the launch of McDonald’s all-day breakfast currently limited to the U.S. market
(McComb), the scope of the analysis will be focused on the U.S market. Further, the U.S. market
is one of the important markets for McDonald’s, as it holds the largest percentage of global
restaurants at 40%, provides the largest portion of global revenue at 32%, and makes up for a
large share of consolidated operating income at greater than 40% (“Company Profile”). Taking a
closer look at its performance in the U.S. market over the last several years (Figure 1),
McDonald’s financial performance has been in a decline as its rate of growth in sales, revenue,
and operating income have slowed down, evening reaching negative rates. Recently,
McDonald’s has seen some success with U.S. same-store sales rising 5.7% in the fourth quarter
of 2015 (Strom), some of which is attributed to the offering of all-day breakfast.
Figure 1: McDonald's Financial Performance (U.S. Market)
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-6
-4
-2
0
2
4
6
8
2010 2011 2012 2013 2014 2015
Percent(%)
Year
Financial PerformanceTrend
% Change in
Sales
% Change in
Revenue
% Change in
Operating
Income

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External Analysis
In our external analysis of McDonald’s and the Limited-Service Restaurant Industry,
there are a few distinctions/assumptions that we will be making. First, there is a vague distinction
between “quick-service” (aka “fast food”) and “fast casual”. As Roberto A. Ferdman captures
the ambiguity of this new category in his article in The Washington Post The Chipotle Effect:
Why America is obsessed with fast casual food, “…the category is only loosely defined at best.
What makes fast casual food fast casual—and not simply fast food? And at what point do we
draw the line between fast casual places and the likes of Applebee's and Chili's, which have table
service, but also takeout? The answer might simply depend on whom you ask.” According to
Technomic, a food industry research and consulting firm, there are 10 markers that differentiate
the fast-casual category: the quality of the food, the use of better ingredients, food that is
wholesome, a perception of freshness, first-rate decor, fair pricing, fast service, friendly
employees, flexible offerings, and a full view of how the food is prepared (Ferdman). We will be
using this criterion when assessing other competitors in the limited-service restaurant space.
Second, the industry classifies the limited-service food chains in segments. Nation’s
Restaurant News, a restaurant industry data and analysis firm, segments the industry into the
following categories; Sandwich, Beverage-Snack, Pizza, Casual Dining, Chicken, and Bakery
Café. Included under the Sandwich segment is Taco Bell, under Yum! Brands Inc. Though some
might not consider their product offering as sandwiches, Taco Bell will be considered a direct
rival during our analysis.
Third, our analysis focuses on the United States and all financial figures pertain to the
U.S., unless otherwise noted. Lastly, our revenue comparison of McDonald’s as a corporation
against its rivals includes revenues generated from its subsidiaries and/or franchisee licensing.

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For example, revenues from Yum! Brand as a corporation will include earnings not only from
Taco Bell, but also KFC and Pizza Hut. We begin our External Analysis by considering the
major macroeconomic trends that have an impact on the fast food industry.
Macroeconomic Trends:
U.S Economy
Following the Great Recession in 2008, the U.S. economy has recovered well. Since
2010, the national Gross Domestic Product (GDP) rate of growth has been positive (“Federal
Reserve…”). U.S capital markets have ridden the bull wave, as the nominal value of the S&P
500 has well exceeded its peak value prior to the 2008 market crash (“Federal Reserve…”). The
U.S. economy has added back millions of jobs since the recession’s lowest point (Diamond), and
the national unemployment rate has drastically reduced to 4.9% from the peak value of 10% in
2009 (“Federal Reserve…”). Recently, economists are starting to reduce their outlook on the
economy, with economists on average predicting a 17% chance of a recession within the next 12
months (Zumbrun). With the Chinese stock market crashing and crude oil prices reaching as low
as $30 per barrel, from which it was previously around $100 per barrel, the outlook on the
economy is not as rosy.
When it comes to the fast food industry, the overall U.S. economy plays a significant
role. With such a large presence in the U.S., fast food restaurants play a large role in the
economy. Specifically, McDonald’s hires about 1 million employees each year and McDonald’s
customers consume around 1 billion pounds of beef each year (Lubin and Badkar). Meats and
vegetables such as beef, chicken, and potatoes, make up the majority of McDonald’s cost of
goods sold. As the cost of these ingredients rise and prices at remain constant, the profit margins
of fast food restaurants are reduced. Not only do fast food restaurants contribute to the economy,

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but also the state of the economy tends to have an impact on the revenues of fast food
restaurants. During recessions, consumers tend to reduce their spending, and cheaper meals
offered by fast food restaurants become more appealing in those economic times.
GovernmentPolicies
Government policies also have an effect on the fast food industry, including the entire the
restaurant and overall food industry. The U.S. Food and Drug Administration (FDA) is
empowered to impose regulations to protect and advance the public health. An example of this
was in 2014 when the FDA announced new rules that “require chain restaurants with 20 or more
locations to begin posting calorie information on their menus” (Aubrey) that will be put into
effect on December 1, 2016 (“Overview of FDA Labeling..”). The motivation behind the new
guidelines is to make consumers aware of the calorie information and hope that they will steer
towards healthier items or eat less. Restaurants not only suffer from having to spend money to
purchase new menus and menu boards that label calorie information, but also deter customers
from purchasing certain items or abstain from entering the restaurant all together causing losses
in sales. There have been studies that found menu labeling is not effective or simply goes
ignored (Carroll). Although in this particular instance, government policy may not necessarily
have had much of an effect on the revenues of fast food restaurants, government policies can also
cause an impact on the costs for restaurants.
In the fall of 2015, the state of New York became the first U.S. state to impose a
minimum wage of $15 per hour on fast food chains that operate in more than 30 locations
nationwide (Sahadi). At the time, the state minimum wage was $8.75 per hour, and the new rate
of $15 per hour represents an increase of over 70%. Other states are feeling the pressure to
follow suit as protests and strikes are taking place in order to similarly increase wages. Wages

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represent the second highest costs that fast food operators face, with the purchasing of
ingredients being the highest (Alvarez). The fast food industry will most likely not absorb the
additional costs and watch their profit margins decrease. Possible actions by the industry include
passing along the higher costs to the consumer with higher menu prices, reducing the number of
employees, or replace workers altogether with technology such as automated systems or kiosk
style ordering windows. Many of these solutions come at odds with the core value propositions
of fast food restaurants that include offering low cost value items and quick service.
ConsumerTrends
In recent years, consumers have developed a preference for healthy, fresh, nutritious,
unprocessed, locally sourced foods (Li). Combining the health preference of consumers and the
perception that fast food restaurants are unhealthy, consumers are moving away from greasy fast
food, and opting for restaurants that offer customizable, gourmet meals in a quick and convenient
manner (“Serving Up Diversity…”). Examples of restaurants that meet these needs are Chipotle
and Panera Bread, which are known as fast-casual restaurants. The demand by consumers for
wanting healthier menus is also causing the fast food industry, and the overall food industry, to
change the ingredients used or remove ingredients deemed as unhealthy such as artificial food
coloring. One such movement that has made a large impact was consumers demanding a ban of
trans-fats. In 2007, New York City banned the use of trans-fats in restaurants (MacMillan). This
movement eventually led to the decision by the FDA to ban all food producers from using trans
fats by 2018, as trans fats were deemed not "generally recognized as safe" for use in human food
(Christensen). The fast food industry foresaw the ban, and in order to appease consumer health
advocates, fast food chains took initiatives to phase out the use of trans fats and resources to
develop a healthier alternative. In 2008, McDonald’s completely stopped using cooking oil

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containing trans fats, with KFC and Taco Bell following suit in 2007 (“McDonald's Cooking
Oil…”). Altering the oil used to fry its food was a risky move by McDonald’s due to the
potential to alter the taste that its customers love, especially pertaining to its world famous
French fries (Hellmich).
Technological Change
With the ubiquity of smartphones and multiple social media platforms, technology plays
a key role for the fast food industry. Through these channels, firms can launch advertisement
campaigns, and analyze various consumer insights. A prime example of this was when
McDonald’s launched a social media campaign called “Our Food. Your Questions,” that allowed
customers to pose questions online and the company providing honest answers in real time
(Starkman). Technological changes can also have different implications for the fast food
industry. Firms that provide on-demand services are becoming more prevalent in the U.S. and in
the world, and they can both aid or hurt the fast food industry. For example, the company
Postmates partners with local McDonald’s to deliver meals to hungry customers that simply do
not or cannot go the restaurant’s location. On the other hand, Uber, the company mostly known
for providing on-demand transportation, launched the service UberFresh that tends to partner
with fast casual or full service restaurants (Harris). Another potentially game changing
technology for the fast food industry is the use of robots to automate the preparing and cooking
steps in the kitchen; thereby replacing the workers that typically earn minimum wage (O'Toole).
Industry Definition: Fast Food
From food trucks to fine dining, the restaurant industry can be divided into multiple
different categories; however, from a macro perspective there are 2 main segments: Full-Service
Restaurants (NAICS: 722511) and Limited-Service Restaurants (NAICS: 722513). Typical

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business operations of Full-Service Restaurants involve customers ordering while seated by a
waiter or waitress, being served at their seat, consuming their meal at the restaurant, and paying
for their meal after eating (naics.com, 2016). On the other hand, business operations of Limited-
Service Restaurants mainly involve customers ordering and paying before receiving their meal.
In addition, a customer’s order can be consumed on-site, taken out, or delivered to the
customer’s location (naics.com, 2016).
The Limited-service restaurants can be further broken down into four classifications; Fast
food, Cafe, Fast Casual, and (Jones). The business operations of McDonald’s Corporation
(McDonald’s) fit within the model of a Limited-Service Restaurant, but primarily focuses as a
fast food restaurant, also known as quick-service, as McDonald’s emphasizes on value and speed
of service by preparing food before orders are taken and offering drive-through services. Fast
food restaurants are different than fast casual restaurants, which typically offer higher quality
food at a higher price point and a well decorated atmosphere that promotes dining in the
restaurant (Parpal, 2015).
Arguably, with the launch of McDonald’s McCafe, one can consider that McDonald’s
could also be considered under the cafe class. In 2015, 5 years after the release of McCafe,
McDonald’s hasn’t grown much in sales, most of which can be attributed to food sales (Lim).
Within the scope of this paper, we will not be considering McDonald’s as a café, because most
of their sales and value is generated through hamburgers and sandwiches.
Industry Lifecycle
This analysis will concentrate on the industry life cycle of Fast Food in the United States.
McDonald’s international expansion and efforts will not be considered in this analysis.

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The Fast food industry in the U.S. is currently in the mature state of the life cycle (Figure
2). The industry revenue growth is forecasted to be flat, seeing an average annual rate of 2%
over the next 5 years to 2020. This industry’s value added to the United States’ Gross Domestic
Product (GDP) is at an average rate of 1.9% over the years to 2020. In comparison to the
estimated U.S. GDP growth of 2.2% over the exact time span, we can further confirm that
industry has reached maturity, given its gradual growth over the span of 5 years and slower
growth rate than the GDP.
Figure 2: McDonald's Position in the Industry Lifecycle
Some macro factors that affect this industry performance are consumer preference in
healthy food, popular trend of fast casual restaurants which offer healthier menu items, and better
ROI on fast food chains outside of the saturated U.S. market. The rate of new stores have also
slowed down, a tell-tale sign that the industry has reached its maturity. Reaching the maturity

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stage of the life cycle, the products within the industry become highly commoditized. Consumers
are very sensitive to pricing, and this creates a heavy price-based competition between rivals.
Since the release of the whistle-blowing documentary Supersize Me, perspectives of the
general public have shifted. They have become more health conscious and this in turn, shifted
the entire fast food industry. Since then, we have seen companies like McDonald’s and Burger
King offer healthier substitutes to existing products; grilled chicken compared to its deep fried
counterpart. In this digital age, consumers are becoming more aware and arguably more educated
about their food. Consumers care about not only the calories that they are ingesting, but also the
source of the products and how it was cultivated or raised. With consumer demands and public
pressure, McDonald’s announced they will be serving menu items using cage-free eggs in the
near future.
Restaurants that supply this demand of healthier and higher quality menu offerings with
the same convenience of service of “order at the counter and seat yourself” are fast casual
restaurants. New competitors in the fast casual space are Chipotle, Five Guys Burgers, and
Noodle Dude, all of whom allow users to fully-customize their orders. These types of
establishments have been claiming their own piece of the market share.
With China’s Fast food industry revenue forecasted to grow by 8.5% annually to 2020, it
is much more attractive than the U.S.’s 2%. This opportunity cost will be a consideration for
restaurant franchisees that are looking to expand.
Consumers are now connected more than ever, and a large trend we are beginning to see
in the fast food industry is tech-savvy ordering (Taylor). Food chains are launching mobile apps
and web apps to assist consumers in ordering food and to provide users with a richer dining
experience. Apps like Starbucks’, gamify their loyalty program by allowing users to unlock

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badges, which in turn reward the user with perks like free refills, upgrades, or a discounts on
premium items. We have also seen application-based services like door-dash or eat24, which
enable users to get food from their favorite restaurant delivered to their doorstep.
Porter’s Six Forces Analysis of the Fast Food Industry
To assess the structure of relationships among all the players in the industry and to assess
the attractiveness of the fast food industry, we performed a Porter’s Six Forces analysis. Using
the framework, we found the industry score to be 4.0 (Figure 3 and Exhibit 1), making the fast
food industry a moderately unattractive industry from a competitive standpoint.
Force
Level II
Score
Level III
Weight
Level III Weighted
score
Threat of Rivalry 4.5 0.3 1.35
Power of Buyers 4.3 0.3 1.29
Threat of Substitutes 4 0.29 1.16
Threat of Entry 2.05 0.05 0.1025
Power of Suppliers 1.6 0.05 0.08
Influence of Complements 3 0.01 0.03
Level III Overall Score: 4.0125
Figure 3: Attractiveness of the Fast Food Industry (Porter's 6 Forces)
Threatof Rivalry
Out of all the forces, the Threat of Rivalry is the most intense, with a Level II score of 4.5
(Exhibit 2). In a very mature market in which the overall market is no longer growing, the firms
in the fast food industry utilize price wars to gain market share. The value proposition of the fast
food industry is to quickly provide value meals at very low prices. Recently, McDonald’s
launched a promotion called the McPick 2 menu that allows customers to pick 2 menu items for
$2 (the promotion now offers 2 menu items for $5), while Wendy’s and Burger King countered
by offering similar bundling promotions with 4 items for $4 and 5 items for $4, respectively (La

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Monica). Further, Burger King and Wendy’s are only a couple of the vast number of rivals in
fast food. There are national competitors, such as Taco Bell and KFC, as well as regional
competitors such as Whataburger in Texas. The high number of rivals contributes to the Threat
of Rivals having a high score. The last main contributing factor that leads to a high score for the
Threat of Rivals is the low switching cost. With fast food restaurants almost located every few
miles, customers can easily drive to a competitor’s restaurant and enjoy a meal.
PowerofBuyers
The second force that is the most intense on the fast food industry is the Power of Buyers,
with a Level II score of 4.2 (Exhibit 3). Similar to the above, the cost for customers to switch
between the products’ of rivals is very low; thus, this increases the power of buyers. Further, the
products that competitors offer are not entirely unique, though each rival tries to differentiate
their products from others. The total addressable market and total serviceable market for the fast
food industry is very large, so if a firm loses one customer it is not critical to their success. On
the other hand, customers can be group into various personas that have certain preferences as a
group, so something that might disinterest one customer from going to a particular fast food
chain may actually disinterest the entire persona group that that one customer belongs to.
Threatof Substitutes
The third and last force that applies the most pressure on the industry is the Threat of
Substitutes that has a Level II score of 4.0 (Exhibit 4). When it comes to fast food, there are
many substitute products such as food from fast casual restaurants, full-service restaurants, or
cooking at home. The threat of substitutes is very high, as consumers can easily move from one
category to another. Cooking at home can be quite affordable and relatively healthy meals can be
prepared; however, the time it takes to cook a full meal at home can deter people to eat out more.

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Full-service restaurants tend to be more expensive, and fast casual being on the more affordable
end. Consumers select a category by trading between parameters such as cost, health, and time;
therefore substitute between categories based on their prioritization of parameters, which can
change day-to-day.
Threatof Entry
The Threat of Entry is one of the more benign forces, and has a Level II score of 2.05
(Exhibit 5). The Threat of Entry is low because new entrants somewhat require a large amount of
capital. Franchising an existing fast food chain is not considered as a new entrant, as the chain
already exists in the industry, and is simply expanding its footprint. A new entrant is considered
as a completely new entity with no existing tangible or intangible assets in the market. Opening a
new single restaurant is more affordable than opening enough restaurants to gain a small
percentage of the overall fast food market.
PowerofSuppliers
Another mild force is the Power of Suppliers, which has a Level II score of 1.60 (Exhibit
6). The main reason why suppliers have such low power is because the products being supplied
are not unique and highly standardized. The meat that comes from livestock farms is not very
differentiated and suppliers typically win business from firms by supplying at the lowest cost.
The same is also true for suppliers of produce, packaging materials, and other items that are not
related to machinery or equipment. Further, there is a large pool of potential suppliers which
places pressure on current suppliers to abide by the demands of the firms. Also, firms such as
McDonald’s purchase a very large volume from their suppliers. As a result, these suppliers most
likely dedicate all their resources and farmed ingredients to supplying McDonald’s. Again, this
puts pressure on the supplier to do what it can to keep its business by serving its only and largest

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buyer, weakening the supplier’s power. The only factor that suppliers have an advantage on the
industry is the lack of substitute products. Though beef can be substituted for other red meats
like lamb, the general population prefers beef when it comes to their hamburgers from fast food
restaurants. Although this metric favor the suppliers, the lack of substitutes is pales in
comparison to other factors affecting supplier power.
InfluenceofComplements
The last force in Porter’s 6 Forces is the Influence of Complements, with a Level II score
of 3.0 (Exhibit 7). The fast food industry does not have many complements, which contributes to
complements having a very low weight in Porter’s Level III score. Complements include the
transportation because consumers need a way to get to the restaurants, and dietitians or gyms
because of the belief that eating a lot of fast food can lead to obesity. Condiments can also be
considered as complements, but for the purpose of this analysis, condiments are assumed to be
supplied by the fast food restaurant and consumers are not purchasing condiments outside of the
restaurant in order to make their meals more enjoyable. Due to the vast differences between the
fast food industry and complements, it is highly unlikely that complements can or will enter the
focal industry; thus complements are not threatening which results in low acting force. On the
other hand, dietitians and gyms memberships offer the complete opposite to consumers in which
these services are meant to get people in better shape and more healthy. These services can
influence and reduce the demand of fast food, which is seen as making people obese and
unhealthy.
In the overall industry, the strongest acting forces acting upon it are: Threat of Rivalry,
Power of Buyers, and Threat of Substitutes. The weakest forces are: Threat of Entry, Power of
Suppliers, and Influence of Complements. Based on all these forces acting on the fast food

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industry, it is moderately unattractive with an analysis score of 4.0 (Exhibit 1). The 4.0 score is
supported by the low industry’s 5-year average on Return on Invested Capital (ROIC) of 5.04%;
however, that of McDonald’s is 12.95% ("The Top Management Teams…”). Based on these
ROICs, it can be inferred that McDonald’s is able to operate in a manner that allows it
outperform the rest of the industry. The Internal Analysis section will investigate how they are
able to do so.
Key Competitors
The limited-service restaurant industry is vast and segmented across various products and
services. When looking at the competitive landscape of the industry, we have classified
McDonald’s rivals into 3 classifications: Primary Competitors, Secondary Competitors, &
Tertiary Competitors (Figure 4). Primary Competitors are rivals who are in direct competition
with McDonald’s from a standpoint of both products and price. In this group, we include major
quick-service or “fast food” chains such as Wendy’s, Taco Bell, and Burger King. Secondary
Competitors operate in the same space, but offer goods and services at either a higher or lower
price. Since McDonald’s is the low-cost leader, competitors in the fast-casual, casual-dining,
and full-service restaurants fall in this segment. Notable competitors in this space include
Chipotle, Five Guys Burgers and Fries, and Roy’s Restaurant. Tertiary Competitors operate in
the food industry, but do not necessarily compete directly with McDonald’s. Services like Blue
Apron that bring fresh ingredients with corresponding cooking instructions to the consumer’s
address would be considered tertiary. The percentage of market ownership that each of the
leading competitors in the limited-service restaurant industry is presented in Exhibit 8.

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Figure 4: Classification of Competitors
External AnalysisofPrimaryCompetitors:
Before we begin to compare and contrast McDonald’s and their Primary Competitors,
there are industry factors to consider that affect all businesses in this space. Fast food chains like
McDonald’s and Taco Bell have a high product turnaround, as burgers and sandwiches are
assembled within seconds and eaten within minutes. Restaurants in this industry however have
historically low profit margins. As Dianna Ransom captured in The Wall Street Journal Article:
Can They Really make Money Off the Dollar Menu?, McDonald’s only earns $.06/dollar per
hamburger they sell off their Dollar Menu. One can also consider products offered from these
establishments, especially products at the $1 price point, a commodity. For around the $1 price
point, consumers can opt to eat a McDouble at McDonald’s, a Jr. Bacon Cheeseburger at
Wendy’s, a Beefy Fritos Burrito at Taco Bell, or a Whopper Jr. at Burger King. This then in turn
forces these chains to be very lean in their operations. We also analyzed the strategic position of
Wendy’s, one of McDonald’s primary competitors (Exhibit 9).

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Arenas (Primary Competitors):
By the definition of quick-service restaurants, McDonald’s, Taco Bell, and Wendy’s offer
cheap products and fast and convenient services. All storefronts are equipped and designed to
handle the surge of consumers during lunch rush. A notable number of these high traffic
locations offer drive-thrus, which average service time is 180.83 seconds ("The Drive-Thru
Performance…”). Menu items offered at these chains are also very similar and they include
burgers, sandwiches, fries, wraps/burritos, salads, specialty beverages, and desserts. In recent
years, McDonald’s has launched their McCafe menu that offers consumers a variety of specialty
hot and cold drinks. Both Taco Bell and Wendy’s focus their products and services to cater to the
U.S. market, whereas McDonald’s has become an international superstar, with a presence in over
119 countries and counting.
Vehicles (Primary Competitors):
The successes of these chains often rely on the hard work and diligence of the employees
at every store location. As McDonald’s, Taco Bell and Wendy’s are franchisors of their brand,
it’s imperative that all franchise locations are operating and adhering to corporate standards. To
educate their employees on operation procedures, services, quality and cleanliness, McDonald’s
created Hamburger University. This is the most distinguished training program offered by any
QSR (Quick-Service Restaurant), as Hamburger University is one of the few programs that is
approved by ACE (American Council on Education) to receive college credit recommendations.
Taco Bell supports professional development through education, and their online Learning Zone
courses also qualify employees for college credit. In addition to the online and onsite job
training, Taco Bell offers GED Certification, scholarships, and a 45% subsidy for an accredited
online college for Associate, Bachelor’s, or Master’s Degree. Compared to these two chains,

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Wendy’s seems to be lacking in personal development for their employees out of the job
description context. Not much information was available pertaining to neither unique training
programs nor support for educational growth. As mentioned, all three companies rely heavily on
the franchise-licensing model, wherein the franchisees pay royalties to use the chain’s brand.
Nearly 82% of McDonald’s storefronts are franchise owned and operated, Wendy’s and Taco
Bell are 85% and 80% respectively.
Differentiators (Primary Competitors):
Though these three Fast Food restaurant chains are competing in a commoditized market,
there are some distinctions in the products and services they provide. McDonald’s is the most
well-known brand in all of fast food, as it placed 10th in the Top 100 Brand LoveList based of off
consumer surveys in social media (“Top 100 Brand”). Taco Bell comes in a close second at 13th,
while Wendy’s trails behind at 55th. The golden arches are known for their classic burger and
fries classics, as well as their breakfast menu items. By being the market share leader, a
McDonald’s burger is regarded as industry standard. This standard is quite low because they are
also the cost leader. In contrast, Wendy’s markets themselves as “A Cut Above”, offering higher
than industry standard quality at a small premium. Taco Bell regards themselves as the
innovators in this space, releasing novel food inventions like the double decker taco or quesalupa
(a quesadilla chalupa hybrid) or teaming up with popular nacho chip manufacturer Doritos to
offer Doritos taco shells. Initially, customization of products was relatively low for the golden
arches and Wendy’s. Menu items were preconfigured allowing some modifications like no
ketchup or extra pickles. Taco Bell offered more customization as customers could order a
burrito with a choice of beef, chicken, steak, or vegetarian.

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A more contemporary redesign of the Quick-Service Restaurant industry was observed in
the recent years. It’s almost as if the restaurant chains have matured along with their consumers.
This is in response to the fast-casual restaurants more edgy, earthy, industrial design language of
both their interior and exterior. This design language increases the perceived value of the brand.
Staging(Primary Competitors):
As stated in our Industry Analysis, the Limited-Service restaurant industry has reached
maturity, and is on the verge of decline. U.S. regions are saturated, and we are witnessing the
closing of poor performing storefronts across all QSR chains. As these chains try to maintain a
hold of their market share in the U.S., they are also planning to expand internationally into
markets where QSRs are in their emergent state of the lifecycle. Ahead of the pack is
McDonald’s, with their current presence in over 100 countries. Taco Bell is serving burritos in
20 countries outside of the United States and Wendy’s has a foothold in 29. Taco Bell is in last
place when compared to the other two chains, but a Bloomberg publication reveals that the
corporation is targeting to go from 280 to 1,000 international stores by 2020 (Patton). Unlike the
golden arches or ringing bell, Wendy’s is reserved about international expansion. Only 1% of
their revenues are generated outside of North America. Without extensive experience or
knowledge in global expansion, expansion looks to be a great challenge for Wendy’s. This is
further confirmed in the Market Realist article: Emerging Markets: Wendy’s International
Expansion Plans, “Finding the right strategic partners in an international franchisee and
managing them will be a challenge for Wendy’s” (Newman).
EconomicLogic (Primary Competitors):
Using their position as the market share and cost-leader, McDonald’s and their well-
trained employees will leverage their super star brand image and highly standardized product

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line to maintain their share leader position in the QSR segment of the U.S. and continue their
international expansion. Their solid grasp of their supply chain and distribution channels is a key
factor in controlling costs and providing infrastructure for rapid expansion in international
territories. Taco Bell’s industry average priced innovative menu items, accompanied by their
educated workforce, will fight to keep their market share while they focus on international
opportunities. Under the leadership of Yum! Brands Inc., who also owns KFC, Pizza Hut, &
Little Sheep Mongolian Hot Pot, Taco Bell looks to achieve their target of 1000 international
locations by 2020. Yum! Brands has a solid international track record, occupying over 120
countries with nearly 40,000 stores. Wendy’s higher price, higher quality burgers value
proposition, paired with their standard employee-training hopes to maintain their market share.
This positioning is shaky, and Wendy’s runs the risk of competing with fast-casual restaurants,
which are serving higher quality premium burgers. They are definitely the late adopters in QSR
global expansion and will find it increasingly more difficult to enter once the market is saturated
with competition.
External AnalysisofSecondaryCompetitors:
Arenas (SecondaryCompetitors):
Chipotle is in the Fast-Casual segment of the Limited-Service Restaurant industry, which
is generally regarded as higher quality than traditional fast-food restaurants. Unlike McDonald’s,
Chipotle serves food made with healthy, carefully-sourced ingredients that is made to order
(Exhibit 10). QSR chains, such as McDonald’s, pre-make popular menu items to help supply
lunch rush demands. Items at times will sit under a heat lamp for long periods of time before
being bagged and served. Their main market is the United States, but is slowly expanding into
the European countries of Germany, France, and the United Kingdom.

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Vehicles (Secondary Competitors):
Chipotle offers a clear and organized career path for their employees. Although they have
a thorough training program, employees are not eligible to earn college credits upon completing
the program. Unlike McDonald’s, Taco Bell and Wendy’s, Chipotle does not operate with, nor
do they believe in the franchise model. Further reinforcing this claim, Chipotle’s
communications director stated in an Entrepreneur article, “We believe that companies franchise
for two reasons. Either they need money to grow or they need operators to run restaurants”
(Taylor). Chipotle does not need either. By refusing the franchising model, the company is able
keep a higher degree of control over their products and services.
Differentiators (SecondaryCompetitors):
What makes Chipotle stand out of the rest of the competition is their healthy, high quality
raw ingredients, and sustainable branding image. Though they only offer a few menu items such
the burrito, bowl, and tacos, the customer is able to highly customize their meal with a variety of
meat choices, toppings, and condiments. “A Few Things, Thousands of Ways” is Chipotle’s
motto. Driving the fast-casual segment’s health initiative, Chipotle prides themselves on their
hand prepared ingredients, such as their hand-marinated and grilled Carne Asada and their fresh
hand-made guacamole. Their ingredients are non-GMO, and they do their best to serve free-
range meats. With a solid product and open kitchen design resembling that of high-end
restaurants, Chipotle is able to demand a higher price than QSRs because of the customers’
increased WTP.
Staging (SecondaryCompetitors):
Chipotle is in a trending fast casual phenomenon within the limited-service food industry
and is expanding aggressively. Since they are opting to forego a franchise model, their expansion

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will not be as fast as that of McDonald’s, but they are forecasted to grow from 2240 storefronts
to 3440 by 2021 (Tice).
Economic Logic (Secondary Competitors):
With their distinguished dining atmosphere, high quality, highly-customizable products
and services, the premium priced Chipotle focuses on expanding both domestically and
internationally, claiming market share from maturing QSR chains like McDonald’s and Taco
Bell. Growth will be challenging for Chipotle as they will rely heavily on suppliers for free-range
livestock, fresh herbs and vegetables that define the Chipotle image.
Internal Analysis
To assess McDonald’s internal strategic position, we will evaluate where it participates in
the Value Chain, the relationships among its initiatives from the Strategy Diamond, and
offensive and defensive positions using the VRIO criteria.
McDonald’s value chain
PrimaryActivities
Inbound logistics:
In terms of inbound logistics, McDonald’s buys raw materials from predefined suppliers
that meet their strict quality standards. McDonald’s quality standards include animal well-being
and corporate relationships with their partners. Using this methodology, they have replaced most
of their old suppliers to increase quality, while maintaining low costs. This supplier turnover
creates revenue-enhancing synergies from higher quality produce provided by the suppliers and
cost-saving synergies by keeping the threat of replacement in the suppliers’ minds. A limited list
of their suppliers is listed as follows: Bread: Fresh Start Bakeries; Apples: Leo Dietrich & Sons;

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Fish: Kenny Longaker, Global Seas Fishing; Lettuce: Dirk Giannini, Christensen & Giannini
LLC; Beef: Steve Foglesong, Black Gold Ranch and Feedlot; Potatoes: Frank Martinez,
Washington State Potato Commissioner; Potatoes: Jenn Bunger, Hoelzer Farm in Pasco,
Washington (“Meet Our Suppliers”).
Operations:
In the realm of operations, McDonald’s opts to go away from highly skilled cooks in
favor of cooking everything from start to finish. Instead, McDonald’s breaks up the process and
employs more workers who are less skilled to complete fewer steps of the food preparation
process. Using the Speedee Service System, a system that is based from Henry Ford’s
automobile assembly line, McDonald’s optimized their cooking and preparation process
(Wilson). Each kitchen has a large grill to cook many burgers in tandem, a dressing station to
add condiments to burgers, a fryer for a single worker to make fries, a soda fountain/milkshake
machine for drinks, and counters for customers to place their order.
Warehousing is used to supply each store with ingredients and raw materials needed for
its daily operations. Warehousing and distribution is centralized rather than being controlled by
each restaurant. Using Weblog, a web based communication software, an inventory manager can
view and change order proposals (“Logistics and Supply…”). This ensures that each location
will have the necessary supplies to operate. Most testing for new types of food is done in kitchen
labs, like the one in their Illinois headquarters, while operational testing is done at the innovation
center warehouse in Romeoville, IL.
Outbound Logistics:
McDonald’s is all about providing high quality food and superior customer service at a
great value in a clean environment. Over the last few years, McDonald’s has optimized their

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menu again and again to cater to specific consumer tastes, and provided nutritional information
after laws were passed requiring fast food restaurants to do so. For each restaurant, McDonald’s
is focused on conserving energy, using sustainable materials for packaging, and waste
management. McDonald’s seeks to remain a profitable business, but also seeks to be more
sustainable and environmentally friendly (“You’re In!”).
Sales/Marketing:
Perhaps the heaviest of its expenses, McDonald’s invests heavily in sales and marketing,
with their SG&A expenses totaling 584M in Q3 of 2015, up from 575.8M in Q3 of 2014.
McDonald’s operates in 119 countries and employs over 1.7 million people. For decades,
McDonald’s supremacy has been fueled by their robust advertising campaigns, spanning
multiple media outlets (TV, Radio, Newspapers, Billboards, Sporting Events, and other
Sponsorships and Partnerships, and social media). Although TV has historically played a central
role in their advertisements, social media has become a very significant marketing avenue in
recent years.
(Customer)Services:
More recently, McDonald’s has coupled amenities with its store remodels, with over
11,000 restaurants in the US offering free Wi-Fi to customers with their purchases. McDonald’s
has also recently been remodeling their stores to have a different look, with over half the stores
adopting this remodeling initiative so far.
SupportActivities
Infrastructure:
McDonald’s infrastructure is very mature and stable, with the company operating 6,554
of its 36,405 restaurants worldwide, franchising the other 29,851 to franchisees. Their current

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model franchises 81% of stores, which they hope to bring up to 90% by 2018 (Alvarez). This
move to franchising is spearheaded by their CEO Steve Easterbrook, who has said he is a big fan
of the franchise model. Most changes are made from the top down, with franchisees being
notified and given time to adjust to any changes. Don Thompson was president and CEO from
2012 to 2015, stepping down in January 2015. He was succeeded by Steve Easterbrook in March
2015.
Tech/product/businessdevelopment:
McDonald’s uses an IT system to track deliveries, inventories, social media activities,
and sales. McDonald’s has made tech support deals in the past to maintain that system.
McDonald’s has also released a mobile app to bring their menu, nutritional facts, and promotions
to the public. In terms of product development, McDonald’s has an innovation center located in
Romeoville, Illinois that fine tunes and optimizes McDonald’s operations and allows stores to
roll out new initiatives prompted by decisions made at headquarters. Products in the innovation
center include new capital equipment to make current food faster, as well as new products
themselves. McDonald’s has created a large initiative for business development in order to reach
their goal of franchising 90% of their restaurants by 2018. McDonald’s looks to operate less and
less of its restaurant and make most of its money from franchising.
HR management:
In terms of HR management, there is a 4 step process in which prospective employees
must fill out an online application, a personality questionnaire, on-job evaluation, and interviews.
In 1961, McDonald’s created Hamburger University located in Oak Brook, IL as a place for
workers to acquire classroom training, hands-on training, and eLearning for jobs at every level in
the company.

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Procurement:
McDonald’s works with specialized farmers that grow a single crop to ensure quality,
freshness, and a daily supply of the best ingredients. Orders and distribution are tracked with an
innovative E-procurement system from Emac Digital. Emac Digital was launched in 2000 and is
jointly owned by McDonald’s and Accel-KKR Internet Co. Currently, McDonald’s gets roughly
80% margins on stores they franchise, versus 20% for the stores it operates. The risk of
franchising includes not maintaining quality standards by losing control of franchisees, and
adversely affecting the brand. The upside to franchising is increased margins and more dividends
for shareholders.
McDonald’s Strategy Diamond
We used the Strategy Diamond framework to assess whether there are any misalignments
in McDonald’s strategy (Exhibit 11).
Arenas
McDonald’s is very active in serving fast, cheap, and convenient food. They span
multiple product categories, including burgers, sandwiches, salads, wraps, and even specialty
drinks. They focus heavily on the cost and time conscious consumers in the US, while focusing
on a luxury experience in Asia.
Vehicles
In order to maintain its dominance in the industry, McDonald’s employs an extensive
training program through Hamburger University, where employees from fry cooks to executives
can attain the information and skills they need in order to succeed at their job. Their joint
ventures and partnerships include commercials featuring star athletes (like Michael Jordan), and

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large sporting events (like the Olympic Games, the high school All-American game). In terms of
licensing and franchising, McDonald’s plans to increase the proportion of its franchised
restaurants to 90% by 2018. As of 2016, they currently stand at 82%. McDonald’s plans to
continue making money by expanding into emerging markets like Asia, Africa, and the Middle
East, where they believe there is room to grow as those regions develop. In order to maintain
their revenue and market in the US, they began offering All Day Breakfast by listening to
customer preferences on social media platforms.
Differentiation
From a differentiation standpoint, McDonald’s plans to win by taking multiple
approaches. They will do this by leveraging their brand image, decreasing customization for
menu options, pricing items by menu segment, and marketing to consumer emotions. They have
also done a pretty good job in styling by revamping the store layout and testing other restaurant
concepts. Their latest foray into testing another type of restaurant was a fast casual concept in
Australia called “The Corner.”
Staging
McDonald’s plans to continuously thrive in a mature market by increasing their revenue
with initiatives like All Day Breakfast. While continuously dominating the US Market, they plan
to rapidly expand into untapped areas, including Asia, Africa, and the Middle East. There they
want to grow their revenues as those regions develop.
EconomicLogic
McDonald’s takes a simple approach in terms of economic logic. They exploit their
advantages in economies of scale and achieve the lowest cost in the industry. They also have a

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proven model, and garner returns through franchise fees from their franchisees, as well as yearly
payments of rent and royalties.
There are several resources that will increase the value of the company and henceforth
increase the customer's Willingness To Pay (WTP). These attributes include the brand value and
brand reach that McDonald’s has created through years of outreach, the vast organizational
structure they have created allows for a set process, great retention, and synchronized policies
across locations. There are financial resources that McDonald’s has obtained through years of
development and franchising. The distribution channel leverage that McDonald’s has is also a
resource that will increase the value as well as the supplier squeeze they have established.
There are still several things that will decrease the costs and therefore increase profit margin.
McDonald’s prides themselves on their operational expertise such as their Speedee kitchen. They
have spent a lot of time driving operations to cut time, cost, and labor. McDonald’s has also
established many partnerships with suppliers and distributors that have led to long term success.
Recently they have begun limiting customization and cutting out products to also add to the cost
reductions.
McDonald's is able to capture and maintain value through their renowned marketing,
teaching programs, and community outreach. They focus on their employees, pricing, and their
promotions. This in turn increases the customer loyalty and retention. With a heavily criticized
company like McDonald’s, there will be many things that hinder the ability to capture and
maintain value. The maintenance of facilities as well as the perceived quality of food is crucial to
the success of McDonald’s. The biggest issue that they have combatted in the past and must

31
continue to address is Public Relations scandals. If they cannot overcome PR attacks they will
not be able to maintain their value perceived.
McDonald’s Resources and Capabilities
McDonald’s takes a strong offensive based on their brand and marketing strategies. The
issue is they are not overwhelmingly defensive as they are public and many of their strategies
could be easily replicated. Even with the backlash from documentaries like Supersize Me,
McDonald's has built themselves a reputable brand that can withstand such attacks. They also
were praised by several sources for their resilience. Even with the health implications that were
widely publicized, McDonald’s was able to adapt and leverage their brand to combat the
negative media coverage (Exhibits 12 and 13).
Financial Position
McDonald’s is the market leader, with a Market Capitalization of $107.3 billion. The
company also has the highest Net Margin at 17.24% and boasts considerable top tier Gross
Margin at 38.05%. However, their P/E ratio sits at the lower tier of the market (25.3 compares to
Wendy’s 42.9 or Chipotle 34.8). The low P/E ratio demonstrates that their stocks or any
investment in the company is not favored by the investors. The market valuation of McDonald’s
conflicts with the financial performance of the company. Therefore, the most acceptable
explanation for this situation is the investor outlook on the direction of the industry.
If we consider any P/E less than 30 to be subpar and anything higher than 30 to be
optimal, all the companies which possess a healthy image such as Wendy, Chipotle, or Panera
belong to the higher end. The obvious differentiation between fast-food and “healthy fast casual
food” presents a decline in fast food and high growth in health-conscious consumers.

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In addition, McDonald’s ROA – Return on Assets – is average amongst its peers
(12.82%). The average ROA ratio implies that McDonald’s does not utilize their investment
resources effectively. The leader in ROA category is Chipotle at 18.04%. Furthermore,
McDonald’s Return on Invested Capital is 17.7% which is also lower than competitors, for
instance, Chipotle stands at 22.97% and Yum Brands at 26.44%. These ratios clearly display that
the resource McDonald’s possesses does not yield financial returns as high as their competitors
(Exhibit 14).
McDonald’s Gross Margin sits at 40%, which is highest amongst their peers. Their
relatively high gross margin shows that McDonald has a cost advantage over the competitors.
This results from utilizing their operating resources and infrastructure effectively. If we take a
closer look at McDonald’s operation structure, the company has a low cost of good sold due to
their ability to exploit economies of scale. Their volume of sales - meals as a unit - is five times
larger than a direct competitor like Burger King. The purchasing power over their suppliers is
tremendous, and McDonald’s leverages their purchasing power to lock in the most favorable
price for their ingredients against the market for a considerable amount of time. Moreover, with
the large market share advantage, McDonald’s has the ability to bring ingredient manufacturing
in house, which can further reduce the cost by cutting the markup margin from a third party
supplier.
In addition to a low COGS, McDonald’s invests heavily in an inventory management
system, which allows forecasting sales of particular items. These innovations help the company
reduce the waste of ingredients and lower the inventory level, which leads to an increased gross
margin and more cash flow generated. On the other hand, we observe a downtrend of
McDonald’s revenue in recent years. The downtrend of sales can be viewed as a signal of

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dropping in WTP level. We believe that the gap between WTP and Price is very small due to fast
food being a mature market, with fierce competition.
Nevertheless, according to an outlook from MorningStar, McDonald’s looks to have the
highest 5-year CAGR (3.8% vs. 2.9% from Yum, 1.6% from Burger King and -3.3%from
Wendy’s) when compared to its competitors. This piece of evidence shows that the difference
from a customer’s WTP to actual Price of McDonald’s items is higher than others. Therefore,
there is still room for the company to increase their price even though that range is very limited.
Insights and Critical Challenges (AKASWOT)
Insights:
The core strengths of McDonald’s lie in their brand value and reach, speed of operations,
menu variety, their franchise model, their community outreach, and their choice of sponsorships
and partnerships. They have done a great job in leveraging the strength of the brand to form
optimal partnerships with premier companies, individuals and organizations to reach a global
audience. Despite these overwhelming strengths they are in a mature market that has only left
them so much room for growth. The fast food market will never completely die due to a high
number of people who are consistently on the road, or low income families. Although the fast
food industry will not entirely disappear, it is no longer a sought after food market. The
introduction of the fast casual market segment has been slowly pushing out those in the fast food
industry.
A SWOT analysis of the factors has outlined the strengths, weaknesses, opportunities and
threats that have really stood out for McDonald’s (Exhibit 15). The strengths, as aforementioned,
are really in the maturity they have gained from being in the industry for 70 plus years. They

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have mastered the speed of their operations, they have established a well-known brand, they are
a globally recognized franchise with a stabilized franchisee model, and they have a plethora of
partners and sponsors that add to their value. In addition, they have corporate strategies that have
been perfected with age involving their training and retention, along with their human resources
division as a whole.
As far as the weaknesses McDonald’s has, these are natural regressions for any long
standing entity. After Supersize Me they had to fight, and continue to fight, a huge reputation
battle to maintain relevance despite negative views towards their brand. They are also situated in
a declining market and therefore must fight to remain stable as evidenced by the financial decline
in the last few years. In an industry built around speed and convenience they must also combat a
lack of differentiation between their products and those of their competitors.
Even in a receding market and with the weaknesses they are experiencing, McDonald’s
has many opportunities to potentially capitalize on. They have moved into several international
locations already, but increased expansion and globalization will be huge as the US market
dwindles. Expanding the menu with gourmet options and standardizing a more global menu has
a lot of potential to help McDonald’s as well. The biggest potential opportunity seen is to create
or buy a fast casual spinoff that could lead to entry into the fast casual market.
Finally the ever lingering threats for McDonald’s include the dying market, the new
competition, and the range of their target market. As McDonald’s has grown, their market has
changed and grown substantially, leaving it ultimately undefined. In a world where fast casual is
trending and pushing fast food out, this itself is an overwhelming threat to the market. In
addition, as has been noted, health campaigns and negative PR will continue to be a battle
McDonald’s must combat and could potentially lose.

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Based on the opportunities and threats identified through the analysis it is clear that there
are aspects McDonald's can capitalize on and improve upon. In addition they have many
strengths and weaknesses that they can grow and challenge. Through these areas we have
developed a short term and long term recommendation plan.
In the short term, we will be implementing a plan that will capitalize on the new
technological trends in the market. McDonald’s will use what they learned from the all-day
breakfast rollout and the social media outcries to continue to use social media to determine the
best next move. They will also continue to strive to be a health leader to dominate the small
niche that the fast food market is becoming.
Long term, we will look into the options involving making or buying an entry into the
fast casual market. After an analysis to determine the best course of action, one of these
recommendations can be implemented to gain market share using the established resources into
the new, dominant sector of fast casual.
In order to determine success and feasibility, we must test whether or not the industry
move to fast casual is rooted in sound logic. We will use Porter’s Three Tests to confirm or
contest whether the market change decisions will validate the industry move.
Porter’s Three Tests
Test1: TheAttractivenessTest
Porter’s first test is The Attractiveness Test, which is used to determine whether the new
industry is attractive enough for to enter and build a long-term competitive advantage. To assess
whether the fast casual industry is an attractive industry to participate in, the Porter’s Six Forces
framework was used. Using the framework, we found the industry score to be 3.76 (Figure 5 and
Exhibit 16), making the fast food industry moderately unattractive industry. Similar to the

36
Porter’s Six Forces analysis performed on the Fast Food Industry, the most intense forces acting
on the Fast Casual Industry are the Power of Buyers, Threat of Rivalry, and Threat of
Substitutes, while the weaker forces are Threat of Entry, Power of Suppliers, and Influence of
Complements.
Force
Level II
Score
Level III
Weight
Level III Weighted
score
Power of Buyers 4.35 0.30 1.305
Threat of Rivalry 3.75 0.30 1.125
Threat of Substitutes 3.56 0.29 1.0324
Threat of Entry 2.35 0.05 0.1175
Power of Suppliers 3.10 0.05 0.155
Influence of Complements 3 0.01 0.03
Level III Overall Score: 3.76
Figure 5: Attractiveness of the Fast Casual Industry (Porter's 6 Forces)
Powerof Buyers
In contrast to the Fast Food Industry’s strongest acting force is the Threat of Rivalry, the
Fast Casual’s strongest acting force is the Power of Buyers, with a Level II score of 4.35 (Exhibit
17). Overall, the Power of Buyers in both the Fast Food Industry and in the Fast Causal Industry
is very similar. It is quite easy for customers to switch from one firm’s product to another, and
product offers are not highly unique. These factors strengthen the Power of Buyers in both
industries; however, in the Fast Casual Industry, products tend to be more expensive than those
in the Fast Food Industry. The higher expense to consumers adds further pressure on to the Fast
Casual Industry, yielding a higher amount of force from buyers.

37
Threatof Rivalry
In the Fast Casual Industry, the Threat of Rivalry is the second strongest acting force with
a Level II score of 3.75 (Exhibit 18). In comparison to fast food, the Fast Casual Industry has a
smaller number of competitors, but still faces a sizeable number of competitors that continues to
grow. With the Fast Casual market growing as well, firms are able to increase revenues by either
growing along with the market or by expanding. This alleviates the force of rivals as competitors
do not need to compete for customers as much. One factor in the Fast Casual Industry that scores
much higher than the Fast Food Industry is ingredients. The ingredients used in the Fast Casual
Industry tend to be fresh and not frozen. This pressures firms to sell their products as soon as
possible, otherwise ingredients can spoil and reduce inventories without increasing revenues.
Fortunately firms can overcome this issue by properly forecasting demand for their products and
planning accordingly.
Threatof Substitutes
The Threat of Substitutes is the third highest forcing factor on the industry with a Level II
score of 3.56 (Exhibit 19). Similar to customers in the Fast Food Industry, those in the Fast
Casual Industry can easily switch to other substitute products such as meals at full-service
restaurants or cooking at home; however, the meals offered by the Fast Casual Industry tend to
be healthier; therefore, consumers tend to favor the products slightly more than those in the Fast
Food Industry.
Threatof Entry
The Threat of Entry is one of the weaker forces acting on industry, with a Level II score
of 2.35 (Exhibit 20). With a relatively competitive market already, it will be difficult for a new
firm with limited resources to enter the industry and be competitive. Further, new firms need to

38
have high knowledge of operations management to maximize utilization of resources, and to
efficiently and quickly serve customers. With the Fast Casual Industry growing, new firms will
be motivated to enter the market; however, customers in this market tend to be more loyal to
firms that have participated in the market for some time such as Chipotle and Panera Bread.
Powerof Suppliers
With a Level II score of 3.10, the Power of Suppliers in the Fast Casual Industry is higher
than that in the Fast Food Industry (Exhibit 21). Once again comparing to the Fast Food Industry,
the Fast Casual Industry has a much smaller number of potential suppliers. This is because the
ingredients that are used in the Fast Casual Industry that are viewed as healthier because they do
not use antibiotics, are non-Genetically Modified Organisms (GMO), are not mass produced and
are generally limited to smaller farms or regions. This smaller number of potential suppliers
increases the force of suppliers in the industry.
Influenceof Complements
Finally, the Influence of Complements in the Fast Casual Industry has the same score as
it does in the Fast Food Industry, with Level II score of 3.0 (Exhibit 22). As previously
mentioned, complements include transportation products and services, and services to help
maintain a healthier lifestyle such as dietitians or gym memberships. It is very difficult and
unlikely for complements to enter info the fast casual industry, which weakens the force of
complements on the overall industry. However, these complements do strongly influence
demand by recommending that consumers eat healthier meals. This in turn strengthens the force
of complements. Because the fast casual industry is growing, the power of complements is
reduced. In our analysis however, it was determined that such a factor held little to no weight in
changing the Influence of Complements.

39
Conclusionof Test 1: TheAttractiveness Test
In the overall fast casual industry, the strongest acting forces acting upon it are: Power of
Buyers, Threat of Rivalry, and Threat of Substitutes. The weakest forces are: Threat of Entry,
Power of Suppliers, and Influence of Complements. Based on all these forces acting on the fast
casual industry, it is moderately attractive with an analysis score of 3.76 (Exhibit 16). The Level
III score of 3.75 is lower than the Fast Food Industry’s of 4.0 (Exhibit 1). This makes the Fast
Casual Industry slightly more attractive than the Fast Food Industry. This is supported by the
ROIC of Fast Food restaurants such as Chipotle and Panera Bread that have 3-year Returns on
Invested Capital of about 23% ("Chipotle Mexican Grill Inc Class A.”) and 17% ("Panera Bread
Co Class A."), respectively. Based on this analysis, the fast casual industry appears to be an
attractive industry for McDonald’s to enter. The next step is to assess how much it would take
for McDonald’s to enter the new industry.
Test2: TheCost-of-entryTest
According to a report from Market Realist, a typical fast casual dining restaurant would
be approximately 3000 square feet and support up to 140 seats. The average cost to construct,
decorate, and furnish a store this size is about $750,000 to $1M. In order to make a significant
impact on the market, we need achieve at least 100 locations (versus In n Out 300 stores, Smash
Burger 300 stores, or The Habit 140 locations). The average Revenue for this type of restaurant
is $280/sqft/year, which translates to $840,000 revenue/store. In addition, the working capital
stays at 13% of sale, which is $110,000/store/year. In conclusion, with 100 stores opening, the
required capital investment is about $120 million, which is the approximately the cost to enter
the market and make a significant impact.

40
Test3: TheBetter-offTest
McDonald’s is the market leader in the fast food industry, especially in the burger
segment. They have a lot to offer but in the fast food industry, but there is only so far they can
continue to go. With the resources that they have to offer such as strong outreach, organizational
excellence, solid HR, and set training they could easily move into a new market with success.
According to Forbes the fast casual industry “is a fresh and rapidly growing concept”.
McDonald’s has enough maturity and resources to be able to move into the new market with a
smooth transition. In competition with restaurants like Chipotle, Panera, and the Counter, they
would be given an edge via their established reputation and procedures. The fast casual
restaurants are relatively new and therefore the 70 plus years that McDonald’s has had in the
industry will give them leverage upon entering the market. Though many of their operational
processes will need to change, they will have a great foundation to work from and the resources
to utilize, including their suppliers, value chain, and operational functions.
Recommendations
McDonald’s has a lot of potential for success based on the reach their brand has obtained.
Based on that determination we have several potential options to consider, and a few solidified
recommendations to pursue in the short-term and in the medium to long-term.
Short-Term Recommendations
McDonald’s looks to be the health leader in fast food. They are actively searching for
higher quality ingredients and strive to be ahead of the competition in terms of quality,
convenience, and price. One example of this is the announcement that McDonald’s plans to have
cage free eggs by 2025. We would recommend that McDonald’s continue this health trend by

41
referencing the consumer health index. Some attributes we would advise them on employing are
low-carb menu options, diversified seafood items, and a focus on white meat poultry items like
turkey and chicken.
We would also advise McDonald’s to continue using technology as a tool to listen to
consumers. Potential applications include using Twitter surveys to ask consumers about their
preferences for international menu items, and app integrations that allow third party vendors to
deliver McDonald’s to consumers ordering from home. Creating social media interaction with
customers would allow McDonald’s to expend as little money as possible and expand their reach
to US customers, and possibly global customers as well. These recommendations look to slow
McDonald’s US decline and keep them in parity or in a short term competitive advantage until
our longer term recommendations can realize returns.
Medium to Long-Term Recommendations
With the slow decline of the fast food industry, our recommendations to acquire a
restaurant and create a fast casual entity of McDonald’s will allow for a sustainable competitive
advantage. Our short term goals to enhance and sustain the fast food empire that already exists
will be more of a competitive parity. In reality, the fast food industry will not disappear entirely
with two prominent market segments driving business: those who travel, and those who are low
income. This has led to the creation of our short term goals which will immediately go into effect
to salvage and maintain McDonald's (Exhibit 23).
In any new venture there will be naysayers that are opposed to change and growth. An
argument can be made not pursue any of our recommendations, but the fear of change is behind
that. A huge concern for McDonald’s moving into the fast casual market will be that even with a

42
new brand they will not be able to overcome their current reputation for gross, unhealthy, and
fattening foods.
A potential resistance to an international menu that is presented across the McDonald’s
board will be the elimination of the novelty. When people travel they are frequently looking for
the novelty of a new McDonald’s item. By making the menu universal McDonald’s will be
eliminating the unfamiliarity that one would experience when they travel. Another issue they
may encounter and will be consistently scaling to meet needs. This will be similar to the issue
they were able to overcome with all day breakfast.
Createa New Brand“grind.”
Key Characteristics:
The main purpose of “grind.” is to provide a completely different dining experience from
traditional McDonald’s stores. With a different brand image, “grind.” can serve the higher end
market and compete with the fast growing casual-dining restaurants without dramatically shifting
McDonald’s core value proposition. The “grind.” should resemble the brand perception of
Panera Bread, Chipotle or The Counter. The key characteristics of those brands are a cook to
order philosophy, upscale ingredients that are not often served in fast food restaurants, and a fun
dining experience.
The first characteristic is a “Cook to order” or “create your own dish” philosophy, which
is the main selling point of fast casual dining restaurants we are examining in this paper.
Chipotle offers “create your own burritos” or The Counter lets customers “create your own
burger.” The process of “cook to order” allows customers to observe their meals being prepared
in front of them, from raw ingredients to a freshly prepared meal. The advantage of “cook to
order” is to ensure customers that the ingredients are fresh and the cooking procedure is handled

43
appropriately. This helps to improve the value of the products, which will increase customers’
WTP.
The second characteristic that differentiates “grind.” from conventional McDonald’s
stores is using upscale ingredients. If McDonald’s is using meat patties, “grind.” will serve
whole high quality pieces of steak. There will be other fresh ingredients that are usually found in
high end restaurants such as avocado, fresh berries, and a full vegetable bar. All of the
ingredients will be supplied by local suppliers and delivered on daily basis. The cost of providing
these organic ingredients will be high, but quality and freshness will justify the higher price
customers are paying.
Last but not least, we want to build a fun place to eat for our customers. A study from
Market Realist shows that the restaurant environment is one of main contributors to the meal
price. The “grind.” not only provides healthy, high quality food, but also offers a dynamic
ambience to dine in. Although the turnover per seat will be lower than a typical fast food
restaurant, the revenue/seat will be higher.
ImplementationPlan:
In order to have an effective branding introduction, we decided that the best strategy
would be to open stores next to established brands that have similar target markets. Some
identified brands are Target, Whole Foods, Boston Market or even competitive brands such as
The Counter, Chipotle and Taco Bell’s Cantina. These brands serve the mid to upper end of the
market segment in term of spending. Moreover, the identified brands also offer a higher quality
of food, and some items that customers are not able to find in other discounted stores. By
opening next to or in the same complex with these brands, we are able to create a certain degree
of brand association. Therefore, customers visiting “grind.” can have a preliminary expectation

44
about the restaurants. This brand associating strategy can reduce marketing costs, while
eliminating any confusion with other “healthy fast food chains.”
The rollout plan is to open flagship stores in 9 of the biggest urban cities which are trendy
in healthy consumer tastes: New York City, Los Angeles, Chicago, San Francisco, Boston,
Houston, Seattle, San Diego and Miami. These cities are not only early adopters but also famous
for tourism. With the amount of media coverage coupled with the clout of independent food
bloggers, these identified markets are amongst the top ten in America in terms of traffic.
Therefore, we can leverage word-of-mouth marketing, create a strong buzz, and reduce the risk
of failure.
We believe that each can optimally serve an area with a population of 200,000. In this light, we
plan to only open in cities with 1.6 million people or more to make sure there are available local
suppliers that can provide the ingredients that match our guidelines stated in the characteristics.
Figure 6 lists the cities and potential stores that can be open. We are planning to reach our peak
number of potential stores in the next 10 years.

45
Figure 6: List of Potential Cities to Launch "grind."
For the marketing plan, we suggest covering three channels of communication:
Traditional media, social network, and high-profile customers. The first priority of advertising
campaign should be to leverage published ads over Facebook or Twitter. Social networking is
our main priority because McDonald’s already has a considerable amount of followers and fans
on their Facebook (62 million likes) and Twitter (3.6 million followers). Announcing releases
and events on McDonald’s social network fan base will tremendously reduce the cost per
customer reach. Moreover, the geographic of audience of McDonald’s social network is
appropriate for the market segment that ‘grind.” Is trying to penetrate.
Our second priority is to cater to influential customers like celebrity chefs and local food
bloggers. These high-profile figures also have their own fan bases, and their opinions can make a
dramatic impact on the expectation of the customers. We conclude that having celebrity chefs
and local food bloggers to announce the introduction of “grind.” can spread the word more

46
effectively than advertising over conventional media like billboards and television. There will be
costs associated with inviting high-profile eaters. However, the cost per customer reach will
certainly be lower than running advertising on traditional media.
Last but not least, we suggest the company runs ads on the conventional channels as well
to be certain to reach the entire market. We prefer the local newspaper and TV channels over the
national ones simply because we only plan to roll out a store in 9 urban cities in the first year.
We would like to avoid the perception that “grind.” is another nation-wide fast food chain and
instead make sure that the core characteristics of the “grind.” brand resonate as a high quality
boutique restaurant to the local market.
FinancialAnalysis:
According to a report from Market Realist, a typical high-end fast casual dining
restaurant is approximately 3000 square feet and supports up to 140 seats. The average cost to
construct, decorate, and furnish a store this size is about $750,000 to $1M. The rent expense in
urban areas like San Francisco, Los Angeles, or Chicago is about $4.25/sqft. We assume the
average revenue/sqft/year of the industry is $280 will be our base case; and the revenue/sqft/year
of the top performers is $480 will be our optimistic case.
To assess the payback period, we used the DCF model with a WACC of 12.5% and set
the revenue growth of our base case as 10%/year (industry average) and our optimistic case as
15%/year(top performers. In addition, we set the perpetuity rate after 10 years to 3% and the net
margin to 11%. We will employ straight line depreciation over 10 years and every fixed asset
will be classified equally (Figure 7). According to a report conducted by NYU, the average
working capital/sale for Restaurant/Dining is 1.87%. We assume that “grind.” will follow the
industry average of the Working Capital vs. Revenue ratio closely. The store opening schedule is

47
displayed in Figure 8, and the number of stores forecasted to open in the future is displayed in
Figure 9.
Figure 7: Depreciation Schedule
Figure 8: Store Opening Schedule for "grind."
Figure 9: Forecasted Number of Stores
According to the DCF Schedule base case (Figure 10), we are expecting to generate
positive cash flow at year 9, and the payback period for this project is expected to be 11 years.
Assuming no new stores open after the number of stores reaches potential, the existing 850 stores
are projected to generate $2.9 billion in revenue and grow at 3% annually. This translates to 12%
of the corporation’s total sales.

48
Figure 10: DCF Schedule - Base Case
Meanwhile, the DCF Schedule for our optimistic case boasts a payback period of
approximately 6 years, with positive cash flow generated in year 5 (Figure 11). The revenue
generated by “grind.” will be an estimated $5 billion and accounted for 20% of the corporation’s
total sales. We concluded that the incremental revenue from “grind.” in both cases is a
significant contribution to the total growth of McDonald’s.
Figure 11: DCF Schedule - Optimistic Case
The payback period of 11 years in the base case is longer than the foreseeable future
regarding the trend of the industry. Therefore, if we decide to build “grind.” from the ground up,
we will have to deal with a tremendous amount of external risk, especially market uncertainty.
However, we are expecting that the probability of the optimistic case is high at approximately
70%, because the fast casual is a high growth industry and the consumer spending is expected to
rise 20% year over year for 10 years (Alvarez).
Merger&Acquisition:
Another route of creating a new entity to counter industry trends is to acquire an existing
brand on the market. There are two key things to consider when we want to buy another firm: the

49
strategy needs to be synced with McDonald’s core values and the financial performance need to
enhance McDonald’s financial position. In this part of the paper, we introduce some key criteria
for the company to use as a guideline for choosing targets.
The first guideline we believe is crucial for future growth is the strategic position of the
target (Figure 12). It must fulfill both purposes of the M&A: to participate with the trendy fast
casual segment, and to create value through synergy.
Figure 12: Strategy Diamond For Target Acquisition

50
We are looking for a company who is participating in the fast casual food market.
McDonald’s is operationally optimized to the burger-making process. Therefore, the products of
their acquisition target should be high quality, premium burgers. McDonald’s can utilize their
operational know-how to help their acquisition target improve the process; make it more cost
effective and increase the margin without compromising the quality.
The second strategy criteria is creating a healthy brand image, especially in high-density
urban areas. We identified that McDonald’s is losing the higher income market segment in which
customers are willing to pay more for a healthier product. Even McDonald’s has been trying to
regain this customer segment by introducing healthier products like salads, and premium burger
products like the Angus Beef & Mushroom. Even with these new product iterations, the
company could not retain their customer base. Therefore, the most formidable way to enter the
fast casual space is to acquire an existing brand in this segment and use McDonald’s resources to
expand aggressively, gain market share, and stay ahead of the curve.
Another important factor for the M&A is a high growth rate. A fast growing company
demonstrates that their products are beloved by customers, and the brand recognition is slated to
increase tremendously. We expect to see that the fast casual industry will become dramatically
competitive in the next two years, and it is imperative that McDonald’s acquire a company with
strong momentum so they can leapfrog their potential fast casual competitors and gain a
considerable amount of market share. We believe that McDonald’s “grind.” brand needs to keep
and maintain over 25% of the fast casual market share to sustain a competitive advantage.
Last but not least, we want a socially responsible brand. McDonald’s for years has been
viewed as an unhealthy, inhumane fast food chain. The company has a considerable amount of
regular eaters, but garners considerable criticism regarding the way the company has been

51
conducting business. Therefore, it is important for us to acquire a brand with strong social
empathy. We want to shift the perception of consumers from processed food and automated
machinery to the notion of fresh ingredients and the development of skills in the workforce. We
believe that this will substantially improve and sustain the acquired brand in the long term.
For financial criteria, McDonalds’ should look at company that helps to improve the
financial performance of the corporation. The company is declining in sales, and McDonald’s
has over 30,000 stores with over $27billion in sales. Knowing this, it is difficult to find a target
that can offset the decrease in sale for the company as a whole. However, we put more weight on
targets that can improve our financial ratios, and the synergy must support the long term growth
rather than the short term compensation for market decline.
The first financial ratio we are looking at is their internal return rate. Our current return
on invested capital is 17.8%, therefore, we must choose a target with the internal return rate of
17.8% or more. McDonald’s is already behind the competitors in term of investment
effectiveness, so acquiring a company with an IRR of less than what McDonald’s already has
would be an ineffective acquisition. With 17.8% or more on internal return, the synergy would
help McDonalds’ improve their ROI, and increase market appeal for McDonald’s shares
The second criteria is that Y-o-Y growth has to be at least 15%. The market leader in fast
casual dining is Chipotle and their growth rate is 15.6%. Therefore, to compete with Chipotle
and jump ahead of the curve, we need a target with a faster Y-o-Y growth rate. Together with the
tremendous amount of resources McDonald’s has, the acquisition target will be able to achieve
the highest growth in the industry. In an optimistic scenario, the acquired entity would have 20%
Y-o-Y growth after the M&A.

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